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Brown and markets

Robert Peston | 08:08 UK time, Wednesday, 30 September 2009


Gordon Brown made a not especially hilarious joke yesterday in his conference speech by saying that if he were to praise Alistair Darling as the best chancellor of the exchequer ever, the media would write the headline "Brown snubs Brown" - or that he was rubbishing his own decade as chancellor.

TOP: Gordon Brown 21 May 1997; BOTTOM: Gordon Brown 29 September 2009But Brown did indeed snub Brown yesterday. The prime minister put the boot into the Brown years at Number 11, or his own tenure as steward of the British economy.

Here's how.

His remarks that the banking crisis had exposed the dangers of free markets were intended as an attack on the Tories.

But it's probably only effective as an indictment of the Her Majesty's opposition for those who have been asleep since 1997.

To state something that is obvious to almost anyone except the prime minister, New Labour - the creation of Tony Blair and a politician called Gordon Brown - was defined by its conversion to the notion that the market is usually a more efficient allocator of capital than the state.

New Labour was - more than anything else - a rejection of post-war Labour's attitudes to the respective roles of the public and private sectors.

Blair and Brown repudiated a long-standing commitment to centralised, state-owned and state-delivered public services. They abandoned a predilection for planning the shape and structure of the commercial sector. And they ditched an instinct to intervene in the affairs of our biggest businesses.

Which grounded them firmly where much of the electorate had journeyed in the Thatcher years. And helped to deliver that historic landslide 12 years ago.

So it is by no means a trivial political event that Gordon Brown should make an explicit attack on what he called a "bankrupt ideology" that "markets always self-correct but never self-destruct".

So what's going on?

Well, it's a somewhat delayed reaction to that recent spot of bother for banks, which - as you don't really need me to tell you yet again - was to a large extent caused by the mis-pricing and misallocation of capital by the free market on a magnificent scale.

This wasn't just any old failure of markets. It was a system breakdown that has prompted a theological crisis for most mainstream economists and an existential crisis for those whom we trusted to deliver financial and economic stabiltity, viz regulators, central bankers and finance ministers.

And for politicians in the centre ground, such as Gordon Brown, there's something of an ideological crisis.

It's all very well to say, as he did, that "what failed was the right wing fundamentalism that says you just leave everything to the market and says that free markets should not just be free but values-free". But for years his government was seduced by this so-called fundamentalism.

New Labour may not have privatised and marketised (oh horrid techno-babble) the entire state, but it was a devout convert to the idea that the public sector should interfere as little as possible in the activities of the private sector and should extend the reach of the market to the way that the public sector buys stuff, builds stuff, finances stuff and supplies stuff.

The reach of the market was lengthened very considerably on Gordon Brown's watch.

But if Brown no longer trusts markets for the efficient allocation of precious resources and the optimal pricing of goods and services, what does he trust?

It is plain that state intervention in the private sector is on the rise. That vanguardist of New Labour, Peter Mandelson on Monday delivered a remarkable sermon on the virtues of what once would have been called industrial meddling.

But what, for Brown, are the appropriate new boundaries between private sector and public sector?

If markets are no longer the best guarantor that resources won't be wasted in commerce or public service, what is the new insurance policy of optimal resource distribution?

It's all very well to ditch a faith, if it can't be sustained by the facts. But I suspect that voters will want to know what will fill the vacuum.

And although bashing bankers' bonuses may resonate with many, it's not really a comprehensive industrial or economic policy.

Labour bets on bashing bankers

Robert Peston | 09:47 UK time, Monday, 28 September 2009


The chancellor and the prime minister are certainly not lowering the temperature of their attack on banks' bonuses.

Alistair Darling and Gordon BrownWhich, I suppose, is significant - even if there's nothing new of substance that they've announced in the past 24 hours or are likely to do in the next 24 hours (see my note of yesterday).

Let's be clear: British banks have already changed their bonus practices fairly significantly over the course of this year, largely due to pressure from regulator, ministers and public opinion.

In particular, for senior bankers, cash bonuses paid at the end of the year and available immediately to snap up the bright yellow Lambo, well they're a beautiful memory.

These days so-called variable compensation typically cannot be pocketed in the year that it is earned. Distribution of readies is deferred and subject to so-called claw-back, linked to the future profitability of relevant deals and the bank as a whole.

But don't cry for the bankers. They can still earn in a year more than many earn in a lifetime, even if they have to hang around for a bit to bank it.

Which remains something of a sore point for millions of taxpayers, who are more-or-less aware that almost no bank would be standing today if it weren't for the £1.3 trillion of support given to them by the state in the form of special loans, investment, guarantees and the creation of new money.

And the bits of their banks that are doing so well this year, the investment banking bits, are profiting from the frantic scramble by governments and companies to mend their finances - which in a way is to say that they are making hay from the resolution of an economic and financial crisis after having made a very special contribution to the creation of that crisis.

If this is an example of modern distributive justice, some would say that Genghis Khan was a caring, sharing leader.

So who can be surprised that Gordon Brown and Alistair Darling want to tap into a national sense of outrage by creating the impression that the banks haven't yet gone far enough in reining in pay?

But what more do they actually want from the City?

Presumably what they would like is to see a serious reduction in the amount bankers are actually paid in this first year after the debacle of last autumn.

So the question, I suppose, is how responsive the banks will be to what's known as moral suasion - or pressure from the chancellor for them to voluntarily slash bonus payments this year.

Alistair Darling will have more of a sense of this later this week, when he's meeting the chairmen of the banks' remuneration committees.

Here's a funny thing. At least one of your biggest banks is actually quite relieved by the bonus-bashing: Royal Bank of Scotland.

It and Lloyds - as the banks most conspicuously rescued by taxpayers - are more constrained then most in their ability to pay bonuses.

And the constraints on them will become more severe, because they are perceived by the regulator, the Financial Services Authority, to be short of capital (the buffer against potential losses).

Which is why they are being forced to insure their loans against future losses with taxpayers through the Government Asset Protection Scheme (GAPS) and/or raise additional capital from investors.

They are therefore most in the firing line to have a limit placed on the respective pools of money they can set aside for deployment in the form of bonuses, according to the stipulation made on Friday night by G20 leaders Pittsburgh (again, for more detail on this, see yesterday's note).

This is more of a worry for Royal Bank than for Lloyds, because it is bigger in the bonus-paying businesses of investment banking.

So if only the chancellor can shame Barclays and the other big banks not to use the lure of fabulous bonuses as a recruitment tool, Royal Bank will find it so much easier to attract and retain all those invaluable traders and financial engineers (which, I suppose, warms the cockles of all us, as de facto owners of this bank).

In a curious way, Alistair Darling and Gordon Brown are doing a favour for the bank owned by taxpayers, Royal Bank of Scotland, by endeavouring to kill the bonus culture everywhere.

Brown and bonuses

Robert Peston | 11:09 UK time, Sunday, 27 September 2009


Gordon Brown just told Andrew Marr that there would be legislation to curb bankers' bonuses - and he implied that what he planned would be tougher on bankers and banks than what other countries were doing.

Gordon Brown talking to Andrew Marr

How significant is this?

Well not very, unless you think that a decision to legislate is per se of interest.

Government members tell me that a short bill - of perhaps 50 clauses - planned for later this autumn will enact what we already know to be government policy on bonuses.

And to be clear, we already knew this bill was coming. In July, the Chancellor, Alistair Darling, told the Commons that he would legislate in the autumn to give the City watchdog, the Financial Services Authority, a new statutory objective for financial stability and give the FSA assorted new powers to prevent banks taking excessive risks and to punish reckless banks.

In other words, the legislation will cover much wider ground than bonuses, picking up the urgent parts of the Treasury's recent paper on "reforming financial markets".

Also, those government members tell me that there will be no new restrictions on how and what bankers are paid that hasn't already been divulged in policy papers or official statements.

Thus, the constraints on bonuses agreed by the G20 leaders in Pittsburgh - which were less radical than some continental countries wanted but were very much the preferred solution of the UK - may be put into this bill.

In particular, ministers feel it may help to put fire into the belly of the Financial Service Authority, the City watchdog, to enshrine in law what the G20 has just agreed on bonuses or "variable compensation" - in particular the stipulation that the amount of variable compensation that a bank can pay out should be restricted to a certain percentage of its total net revenues when there are concerns that it may have too little capital, the essential buffer against potential losses.

But for the avoidance of doubt, this would be a restriction on the funds available to a bank perceived as too weak to pay bonuses, not on the size of any bonuses that any bank wished to pay to individual bankers (even the weaker ones).

Also, the recommendation of Sir David Walker - appointed by the Treasury to review the so-called "governance" of banks - that there should be greater disclosure by banks of how much they pay their top people, well that too may well be included in the new law.

In fact, the City minister, Lord Myners, has been arguing that Sir David has perhaps been a bit too timid on this: Lord Myners wants the identities of those receiving the big bucks in banks to be disclosed, whereas Sir David would keep their names secret (if they are not on the board).

And what of the prime minister's claim that the UK is being tougher on bankers' pay than other countries?

Well that seems hard to sustain. In the Netherlands, for example, a ceiling is being imposed on the absolute amount in bonuses that any particular banker can receive.

Mr Brown has no plan to impose such a bonus cap in the UK.

In other words, nothing substantially new was announced by the prime minister this morning.

Although maybe it was new to him, in that I am told the chancellor gave him a long briefing on all these already-disclosed measures on the flight back from Pittsburgh.

Ball not going to ITV

Robert Peston | 12:39 UK time, Friday, 25 September 2009


Tony Ball has walked away from ITV.

The former Sky boss will not become chief executive of the commercial broadcaster, I have learned.

He had set a deadline of this weekend to agree terms and the two sides failed to sort out everything.

There were two stumbling blocks: some non-financial elements of the contract and the board's suggestions of candidates to replace as chairman Michael Grade, whom Ball regarded as unsuitable.

Update 1324: I am told that it was the ITV board's nominations committee which last night met and decided to cease negotiations with Tony Ball.

The final straw, I am told, was Ball's opposition to their leading candidate to be the new chairman of ITV and his misgivings on other candidates.

The two sides were almost there on his pay package. There were a few outstanding items to be resolved, such as what he would be paid in the event of his contract being terminated.

So it's back to the drawing board for ITV to find a new chief executive - which won't be easy with its part of the commercial television industry in such dire straits.

Update 1524: So how will a new chief executive be appointed?

Well, the plan has changed. What is now likely to happen, perhaps as soon as next week, is that a new non-executive chairman will be appointed (Michael Grade is currently executive chairman - so in effect both chairman and chief executive).

And the lucky new chairman will be given the questionable privilege of then overseeing the re-started process of finding a chief executive who can command the confidence of the TV company's owners.

The potential candidate for chairman who Tony Ball didn't want is Sir Crispin Davis. He is standing down as chief executive of the publishing giant, Reed Elsevier.

Many will understand why ITV's board felt it inappropriate that a chief executive should have a veto on who should have the role of holding the very same chief executive to account.

Another name on the list of candidates was Sir Michael Bishop, the recently retired founder of BMI and a former chairman of Channel 4.

There are two other potential candidates.

ITV may be looking at Helen Alexander, former chief executive of the Economist and currently president of the CBI, as a potential chairman.

She told me in a recent interview that these days she is much more interested in being a chairman than a chief executive.

Update 2012: Here's a bit more on the messy failure of ITV to appoint Tony Ball as its chief executive, in spite of weeks of negotiation.

There were two main stumbling blocks. One was that Ball was advised by his lawyer that the clause in the proposed contract relating to early departure left him vulnerable to receiving little reward for any uplift he had achieved in the value of ITV.

Apparently the so-called good leaver clause proposed by ITV was unusual in giving wider discretion than normal to the company to distribute zilch to Ball if he left before the expiry of his proposed five-year deal.

But Ball's appointment was killed when he manifested uneasiness about the board's late disclosure to him - after he had been given a list of other candidates just on Wednesday by the ITV non-exec Sir James Crosby - that it wanted to appoint Crispin Davis as chairman.

Ball was not - I am told - trying to dictate who should be chairman. However he was hoping the chairman would have a financial background, because of the scale of the reconstruction of the business he wanted to carry out.

He was - somewhat unfashionably - hoping to have a banker as chairman, rather than an electronic publisher like Davies.

Tonight Ball said this in a statement:

"Earlier this week...the ITV board imposed an ultimatum over the appointment of a new non-executive chairman. Whilst I was ready to participate in a debate about the company's next chairman, the board decided it no longer wished to proceed and my candidacy - initiated with the support of several large shareholders - was terminated."

Anyway, although ITV terminated the talks, Ball too was assuming it was all over - largely because of the impasse over the termination clause.

He believes some on the board never really wanted him, but were going through the motions of negotiating because a number of big shareholders backed his appointment.

G20: History and fudge

Robert Peston | 09:28 UK time, Friday, 25 September 2009


Plainly the most important announcement to come out Pittsburgh today will be that the G20 group of nations will replace the G8 as the permanent council for economic co-operation and - especially in extremis - economic co-ordination.

US President Barack Obama and First Lady Michelle Obama welcome Indian Prime Minister Manmohan Singh and his wife Gursharan Kaur to the G20 dinner at the Phipps Conservatory on 24 September 2009 in Pittsburgh, PennsylvaniaIt's a big thing that the rich nations of North America and Europe will formally acknowledge that they no longer have a monopoly of wisdom on what's good for the global economy.

In fact - and call me naive - it seems a very big thing to me, even though all we're going to get is confirmation of a power shift that in practice happened last autumn.

That Argentina, Brazil, Indonesia, India, China, Turkey, South Africa and Saudi Arabia, inter alia, are now at the top table: well, it was unthinkable until the banks and bankers of the West made their formidable contribution to the worst economic and financial crisis since the 1930s.

However, the new members of the super-elite presumably feel slightly alienated from the squabble of recent weeks between the Franco-German club and the Anglo-American axis over how much capital banks should hold as a buffer against losses and how to limit the quantum of bankers' bonuses - in that there haven't been many (or any) Chinese and Brazilian banks holding the global economy to ransom over the past year.

There will of course be a fudged agreement before the day is done.

In fact, given that all the important negotiations tend to be done in advance of these meetings and in the corridors and side rooms, most of the fudge has already been prepared.

There won't be any kind of bald incomes policy for bankers. There'll be no explicit statement that individual bonuses can't be greater than a specified amount.

But the total pot of money available for bonuses at banks that are short of capital will be dictated by regulators.

Which - many would say - is really not a great change from where we are today, in that it would be a gross dereliction of duty by regulators if they allowed a thinly-capitalised bank to pay out fat bonuses rather than using whatever available cash there is to build up the important buffer against losses (although, of course, we did see just such negligent supervision of banks for years).

Also, it is likely that - in spite of opposition from the French and the Germans - a leverage multiple will be introduced into international banking rules, which means that gross lending by banks could not be more than a specific multiple of their capital resources.

That said, the leverage multiple won't initially be included in Pillar One of the Basel rules on capital adequacy, the global framework for ensuring that banks' finances are robust enough to weather storms.

It will be a supplementary measure, which will gradually be migrated into Pillar One, subject to negotiation on its level: is a safe bank one that lends 20 times it capital, or 25 times?

That phasing-in would allow French and German banks - some of which have lent well over 30 times their capital resources - the time to increase their capital resources.

So the thrust of the G20 agreement will be to patch up the Basel rules. And some would say that endeavour is fundamentally misguided, because it was the Basel rules which created the perverse incentives for banks to take the crazy risks which hobbled the global economy.

What's not on the agenda of the G20, as you've heard me say many times, is either wholesale replacement of the Basel rules with much simpler, harder-to-dodge stipulations on how much banks can lend relative to their capital - general, broad rules less amenable to gaming by banks - or structural reform of the banking industry to separate the taxpayer-insured bits that are vital to our economies from the casinos.

For all the revolution in global economic governance, for all the importance of the arrival at the top table of the new economic powers, the G20 is endeavouring to patch up the failed framework of banking regulation rather than going for more fundamental and radical change.

Gordon Brown's monuments

Robert Peston | 17:56 UK time, Thursday, 24 September 2009


No member of the government is closer to Gordon Brown than Shriti Vadera.

The former banker was an adviser through his many years as chancellor and has been a minister since he became prime minister.

Gordon Brown and Baroness VaderaIn a way, she's his personal investment banker - the woman who co-ordinated last year's rescue of Britain's biggest banks, the brains behind the financing of all sorts of big public sector projects that were kept off the government's books, the organiser of the cancellation of debt owed by the poorest countries.

Her loyalty to him is total and - predictably - her decision to stand down as a minister is at his request, so that she can concentrate on what he regards as the big challenge of the moment: viz, how to make the global economy more stable.

She's becoming in effect the first employee of the G20, the new group of the world's most powerful countries - including the fast growing economies of Asia and South America - that has supplanted the G7.

Her role will be to advise on the design of the new institutions that must be created to make a reality of the G20's determination to better co-ordinate the economic stewardship of individual countries.

The G20 leaders are set to agree a so-called "framework of sustainable and balanced growth". It stresses the importance of eliminating imbalances - which is code for cutting the surplus savings of the Middle East and much of Asia which have been recycled into the excessive borrowings of much of the west, notably the US and UK.

However this framework document contains little detail on possible mechanisms and institutions for actually making sure that individual countries manage their economies with more sensitivity to the impact on near and distant neighbours.

Gordon Brown would love his legacy to be monumental G20 institutions that became the first bulwark against the kind of bubble that precipitated our recent economic woes.

Little wonder then that he has asked his staunchest ally, Shriti Vadera, to help build them for him.

What's in Cadbury's wrapper?

Robert Peston | 10:36 UK time, Thursday, 24 September 2009


I had thought that Cadbury was utterly persuaded that its future should be sweet as an independent company - that the somewhat nebulous takeover approach from Kraft was a bit of an annoyance.

And in a non-jingoistic way, I'll admit to being a little relieved.

Just as I would quite like to see a few more British players in the Arsenal team, I would like to preserve a few of our great corporate names as British businesses.

It's not rational; it is emotional.

Cadbury chocolate bar

The economic reasons for insisting that a plant based here has to be managed from a UK domicile are not overwhelming.

A policy of British factories owned by British companies might yield a bit more tax for the Exchequer.

It might also provide spin-off trade for other British companies, because businesses of a certain nationality tend to have a prejudice in favour of working with other businesses of the same nationality.

But there are also counter-arguments - such as securing access to overseas markets via overseas parents.

I've rehearsed these arguments and others many times here in this column since its debut at the start of 2007.

In the end, of course, if someone comes along and offers to buy a company for way more than that company will be priced on the market for years, then you would be crazy to turn that down.

But it's not clear that Kraft has done that - especially since much of the currency it wants to use is its own shares rather than cash of an immutable value.

Which is why the chief executive of Cadbury, Todd Stitzer, needs to clear up what he meant when he said at a meeting organised by Bank of America that there is "some strategic sense" in Kraft's offer.

Presumably there must be strategic merit for Kraft. But for Cadbury?

Cadbury's shareholders will want to know how much Mr Stitzer really likes his own sweeties.

Turner: Not banks' enemy

Robert Peston | 08:51 UK time, Wednesday, 23 September 2009


The chairman of the Financial Services Authority has upset a few bankers by declaring that he won't be a cheerleader for the City and that quite a lot of what they got up to over the past decade was "socially useless".

But a proper reading of Adair Turner's speech at the Mansion House last night should reassure them. Some will argue that the regulator-in-chief is letting them off lightly. So perhaps it is the greater citizenry - most of us - who will now be miffed at him.

Adair TurnerMost significantly, he is some considerable distance from arguing for radical reform of the structure of the banking industry.

While opinion at the Bank of England has hardened in favour of breaking up the banks, of separating their retail operations from their so-called casinos (see my note last week, "Banks can learn from retailers"), Adair Turner retains a touching faith that regulators will in future be able to eliminate the risk of taxpayers picking up the tab for investment bankers' recklessness through the judicious application of variable capital requirements.

Some will see this as the triumph of hope over the experience of a financial crisis that on some measures was the worst the world has ever seen.

And, so far Turner has rested his defence of this aspect of the status quo on the practical difficulty of distinguishing between the bits of a bank such as Royal Bank of Scotland or Barclays that are core utility functions, deserving of insurance provided by taxpayers, and which bits fall more squarely in the caveat emptor, wholesale and speculative categories.

He says there are some trading activities, for example, that even a pure retail and commercial bank would need - and that therefore it would be somewhat arbitrary to draw a line that says one group of traders could stay in a taxpayer-backed bank whereas another group would have to be cut loose to take their chances in the free market.

But it's not clear to me that he is being wholly consistent here. Because if he is going to make safe the speculative activities of banks by insisting they hold far greater capital as a buffer against potential losses than hitherto, then plainly he is confident these activities can indeed be clearly identified.

And if the bits of Barclays and Royal Bank that are riskiest can be picked out for the purposes of forcing them to hold more capital, then presumably they could also have a line drawn around them that would allow them to be segregated, separated, demerged.

So if Adair Turner believes there is a powerful case for preserving the universal bank - one that provides essential credit, protects our savings and is part of an indispensable network for moving money around, all joined on to the seductive, glamorous casino - he needs to demonstrate three things.

First that it wasn't these universal banks and associated financial institutions that caused the most havoc in the recent crisis. Which may be hard to do, since the bulk of taxpayer support has indeed been provided to the likes of Royal Bank of Scotland, Citigroup, UBS and AIG (which was a universal bank by another name).

For the avoidance of doubt, they weren't the only culprits. But it was when they were tainted that we were staring into the abyss. We could not afford to lose a single one of them, let alone the lot. The collapse of Northern Rock, Washington Mutual, Lehman Bros and HBOS would have been much less dangerous if there hadn't been contagion to much bigger and more broadly based institutions.

Second, he needs to make the case why - in spite of the mess these universal banks made of things - it is in the interest of the wider economy that such banks should continue to exist. And he would need to take head on the arguments of John Kay and Andy Haldane that universal banks are intrinsically lousy retailers, designing products whose purpose is to befuddle consumers into paying excessive fees and interest.

Third, and most importantly, he would need to demonstrate - beyond a doubt - that the so-called living wills that universal banks are being asked to draw up will end the iniquity of their investment banking activities being implicitly supported by taxpayers.

There is no doubt that any universal bank's casino or investment banking arm has been able to attract cheaper funding over many years because of creditors' confidence that in the event of a crisis the entire bank would be rescued by taxpayers, that the state would not allow the casino to fail.

And creditors have been proved absolutely right over the past year (Lehman was allowed to go down, but it wasn't a universal bank). We did bail out the whole of RBS, Citi, AIG, UBS and so on.

It is counter to common sense and social justice that taxpayers should insure investment banks, which are no more socially or economically useful than any other kind of imaginable business.

So the question for Adair Turner is whether he really thinks it would be easier, more practical and in the interest of the UK (or the world) to endeavour to prevent the subsidisation by taxpayers of universal banks' less socially useful functions through regulation, the imposition of internal firewalls, complicated legal ruses, rather than the cleaner method of breaking the banks up.

Turner himself gave one rather graphic example of how banks are making hay out of the support given to them by the public sector. He pointed to investment banks' recent generation of very large profits and said:

"these profits are, to a significant extent, being earned because of specific post-crash circumstances: increases in the market share of the survivors, government guarantees and central bank liquidity support; very low interest rates; volatility; and large government debt issues."

Which is why, in his view, those substantial profits are "a legitimate matter of social interest, rather than a private matter [for the banks]".

What follows - for him and for his fellow regulators on the Financial Stability Board in their report to the G20 leaders - is that these high profits should primarily be deployed to strengthen banks capital resources (and support lending), rather than being used to pay fat bonuses or dividends.

Or to put it another way, there will be an international agreement to limit bonus payments at banks that are perceived to be too thinly capitalised. And Turner says that "over the long term there will be a legitimate interest of regulators in aggregate bonus payment rates if and when these payments have implications for capital conservation".

Many will see this as a fudge, since Turner is explicit that "for regulators the key long term issue is not the level of pay but the structure of payments and the incentives they produce".

But even this messy business of making sure that bankers' remuneration doesn't undermine their respective institutions would be so much easier if the casinos could be left to their own devices, wholly separate from utility and retail banks in which taxpayers will always have the right to butt in.

The market price of cutting airline emissions

Robert Peston | 09:00 UK time, Tuesday, 22 September 2009


Whenever I talk or write about how the outlook for growth in the UK, US and some other parts of the world is much worse than it was before the Crunch, there are some who always respond that they're delighted.

These tend to be individuals concerned about climate change, and fearful that the world's governments and big businesses will never reach agreement on stemming emissions sufficiently - because the benefits are always slightly further away than the immediate financial pain of producing less or investing in expensive green technology.

But if we could only muddle through in a world of low or zero growth, they say, we'd all be so much better off in the long term - because we would not be incurring tomorrow's climate-change costs for today's nebulous and transient (in their view) prosperity.

So will the voluntary agreement announced today by the airline industry to reduce net CO2 emissions by 50% by 2050 compared with 2005 levels reassure these doubters?


Unless they're peculiarly uncharitable, they'll say it's a useful journey in the right direction.

But they won't be uncorking any kind of carbon-neutral, celebratory beverage - because the industry does not expect to stabilise emissions until 2020. Which most psychologists would say is too far away to serve as much of a deadline.

And the associated commitment to improve so-called CO2 efficiency by 1.5% a year on average is vitiated (or so critics would say) by the inclusion of the words "on average" - it allows plenty of wriggle room for semi-worthless promises to do better if CO2 efficiency were not to improve.

So there'll be concerns about the enforceability of the commitments. And also worries that the promised cuts - large as they may seem - are not enough.

Aviation emissions currently account for just under 2% of global emissions, but have been growing fast, so the offer of cuts by the industry may be seen as too little in the context of gains in energy-efficiency made in other parts of the economy.

Far more effective in reducing carbon emissions, for the airline industry and more widely, has been the global recession. When all those factories shut down in China and other parts of East Asia, when airline travel slumped, the impact on emissions was significant.

According to the International Energy Agency, global CO2 emissions will fall more than 2% this year - with most of the decline the result of the weakness of the economy, rather than the fruits of deliberate government policies.

But to state the obvious, no government will be re-elected on a platform that recession is good for us and should be prolonged indefinitely, so world leaders are still on the hook to make difficult sacrifices at the climate-change summit in Copenhagen later this year.

And here's the striking thing. British Airways' share price is a bit higher this morning in a rising stock market.

Which doesn't imply that investors see BA as enduring serious pain for long term gain.

An emissions pact that is share-price neutral is probably not carbon neutral.

Should students pay our bills?

Robert Peston | 16:16 UK time, Monday, 21 September 2009


Perhaps it's an Oxford and FT thing.

First we had Ed Balls (schools minister, ex-FT commentator, educated Keble, Oxford) suggesting cuts in the schools budget and today Richard Lambert (director general of the CBI, ex-FT editor, Balliol, Oxford) proposes that university students pay increased tuition fees.

Student silhouetted in front of The Sheldonian Theatre, OxfordWhen I heard what the CBI was recommending, I assumed this would be predicated on a hard-nosed capitalist analysis.

The argument, surely, would be along the lines of saying that a student should pay a price that captures the uplift to his or her earning power from the relevant course and qualification, the private gain, as opposed to the benefit for society.

That would have a certain ideological coherence, and might well resonate with many of the business group's members. Although it might not appeal to all of you.

However that's not really where the CBI's task force (led by Sam Laidlaw, chief executive of Centrica, old Etonian, Caius, Cambridge) is coming from.

And probably a good thing too.

Because there's rather more art than science in establishing a "fair" price for higher education, one which allows the purchasers (the fickle 18-year-olds) to believe that they really will have a lot more delicious jam tomorrow if they burden themselves with substantial debt today.

In fact, strikingly, the CBI is almost voting for Christmas - in that it actually wants companies to pay a bigger price for the benefits they receive from university.

The CBI is unambiguous that the UK's putatively world-class higher education system is not a free lunch for companies - which need to be a bit keener to pick up the bill for keeping themselves and the UK competitive in the global marketplace.

That said, there's no suggestion that this bill for companies should be in any sense obligatory - just a voluntary contribution to the greater prosperity.

So the CBI recommends that companies sponsor more students to do the courses - especially in science, technology, engineering and maths - that are particularly valuable to them.

Science students in laboratoryAnd it says that they should pay signing-on bonuses to students who take the degrees they want.

Which for those in the private sector who fear that the bonus culture is on the run is probably an example of inculcating the faith while the tomorrow's leaders are still young and pliable.

In the round, the CBI wants much greater collaboration between universities and business.

That's a refrain we've heard many times over the years. But this is probably not the time to ignore it, since indebted, no-growth Britain needs to start paying its way in the world pretty sharpish.

So what is the argument then for whacking up what students pay - and not as a voluntary tariff?

Well it's simply that the CBI assumes - uncontroversially - that with the national debt inflating rather faster than A-level results, there will be tough public-spending choices for a government of any colour in the coming year or so.

And it believes the realistic alternatives are cutting research funding, slashing teaching budgets, reducing student numbers or whacking up the financial contribution made by undergraduates.

Presented with that unappetising menu, the CBI thinks the UK will be least damaged by demanding that the young pay more for their own improvement in two different ways: by pushing up tuition fees; and by increasing the interest rate on student loans to the rate actually paid by government for servicing its own debt.

Which may be rational, so long as the deterrent effect of higher fees is not too great. And so long as those from poorer backgrounds are protected through maintenance grants and special bursaries.

However, there is also an issue here of inter-generational social justice which the CBI ignores.

More by luck than desert, the generation of Lambert, Balls, Laidlaw and even Peston have had it pretty good.

We had free university education.

We have saved for a pension over the many years of a bull market and when companies and the public sector felt obliged to offer gold-standard final salary pension schemes.

We managed to get on the property ladder before house prices became ludicrously inflated.

And guess what? It was our generation which royally messed up the economy with the inadequate governance that led to the credit crunch and the worst global recession since the 1930s.

We're - on the whole - alright Jack, thanks to the accident of when we happen to have been born.

But those leaving school and university today face an altogether bleaker future: a drought of jobs; a bewildering and unappealing set of options for saving and investing; over-priced residential property (even after the "correction"); relentless fearsome competition from India, China, and so on.

And there's the costs of providing a health service and welfare state to sustain an older generation - of Lambert, Balls, Laidlaw and Peston - whom the actuaries say will go on and on and on (heaven help us).

By contrast, it is also striking that the CBI concedes that the cost to taxpayers of our higher education system is not great compared to other wealthy economies.

So some may well argue that as and when a new government decides to make cuts or increase taxes - to fill the hole in the public finances created by the current generation - its first instinct should probably not be to penalise students. Shouldn't the older generation bequeath them something other than debt?

Lloyds: Mind the GAPS

Robert Peston | 11:45 UK time, Friday, 18 September 2009


Lloyds has put out a statement today that it is still exploring alternatives to making any use at all of the "Government Asset Protection Scheme" (which apparently is now known as "GAPS" - presumably because it is supposed to fill the "gaps" or gaping holes in its balance sheet).

If you read my note of last week, in which I said that Lloyds was trying to pull out of GAPS or scale down its involvement in the scheme, you will think this isn't news.


But actually quite a big thing has happened since. Which is that Lloyds has been told by the Financial Services Authority how much capital it would need to raise were it to abandon entry into GAPS.

And the City watchdog has told Lloyds it would need to raise more than £5bn in excess of what Lloyds thought it would have to raise - which, in order to confuse you, I will call the GAPS gap.

Which means that were it to remain outside of GAPS, Lloyds would have to raise well over £20bn of new capital, though not quite £30bn.

This is a big chunk of change. And when Lloyds' directors heard the news, they were bitterly disappointed, because they are desperate to minimise the succour they receive from government, from taxpayers.

However, raising more than £20bn is a tall order for a bank whose total market value is only £30bn.

Which is why yesterday and overnight there was a flurry of reports that Lloyds would inevitably remain in GAPS.

Now, that may turn out to the case. That said, Lloyds is shouting loudly that it will make a last-ditch attempt to raise the capital needed to steer clear of GAPS.

Why Lloyds' visceral horror of becoming more dependent on the state?

Well, the explanation is largely commercial.

Before elucidating, it probably makes sense to remind those of you who aren't bonkers for banks why Lloyds and its ilk need capital and how GAPS serves as an alternative to capital.

All banks require capital as a buffer to absorb losses on loans and investments that go bad. Without capital, those losses would fall on depositors (a big hello to you and me). And so depositors would never keep their money in a bank that had inadequate capital.

In other words, banks with too little capital are either bust or a long way down the road to the arid land of bankruptcy.

Earlier this year, a couple of our biggest banks - Lloyds and Royal Bank of Scotland - were both judged by the Financial Services Authority to require a truckload of additional capital, because they faced colossal future losses on their reckless lending and investing.

And, by the way, it's part of the FSA's mandate to adjudicate on the capital needs of banks, which is a task it performed inadequately for many years (though is probably doing a bit better now).

At the time, in the bleak mid-winter, the mood in the markets was of panic and despair. Lloyds and Royal Bank were unable to raise the necessary capital from commercial sources: there was little appetite to invest in them.

The necessary capital could have come from the state, from taxpayers. But this would have meant almost complete nationalisation of Lloyds and Royal Bank, which were (and are) already owned to the tune of 43% and 70% respectively by taxpayers.

For whatever reason, the government decided it did not want even more control over these two banks. So it designed an alternative way of strengthening them, of protecting the banks and their depositors from the losses that would be incurred on their loans and investments.

This was GAPS, which is - broadly - an insurance scheme.

The two banks were to put £585bn of loans and investments (or assets) into GAPS.

Lloyds and Royal Bank would incur the first 10% of losses on these losses. But taxpayers would suffer 90% of any losses after that first 10%.

So taxpayers - all of us - were in effect becoming human capital, living-and-breathing loss absorbers for banks.

Which may not appeal to you. But fear not. The Treasury did not volunteer our services for nothing. It insisted that the banks pay a fee for GAPS.

And one of the things that Lloyds doesn't like about GAPS is that it thinks the fee is too steep. Some of Lloyds shareholders agree - which is why, now that markets and the economy have recovered a bit - they are prepared to provide capital to Lloyds, to invest more in the bank, in a way that they weren't prepared to do seven months ago.

There is another reason why Lloyds doesn't like GAPS: it is state aid; and as state aid, it gives considerable sway to Neeilie Kroes, the European Competition Commissioner, to interfere in its affairs.

The point is that she has a mandate to dismantle any giant bank that's in receipt of taxpayer support. And Lloyds, having bought HBOS, is a prime candidate - or so she thinks - for break up.

Here's the formula that Lloyds hates: the more state aid it receives, the greater the disposals which she can force on it (or so the bank thinks).

Which is why Lloyds wants to minimise its use of GAPS, so as to give Neelie Kroes less power to hive parts of it off (that said, bankers close to Lloyds tell me that the widely circulated notion that it might be forced to sell off all of Halifax's branches - which it acquired with HBOS - is incorrect).

So what is Lloyds going to do now?

Well it will move heaven and earth over the next fortnight to try to raise the £20bn plus.

If it succeeds, this would involve a rights issue of new shares of up to £10bn, the conversion of well over £10bn of lower quality capital into better quality pure equity, and a major disposal.

Will Lloyds pull this off in the time available? Odds must be slightly against.

So, as I said last week (which may make you wonder why you've bothered to read this far - if indeed you have), the chances are that Lloyds will go for a hybrid, a mixture of a scaled-down commitment to GAPS and a smaller fund raising.

There is, however, one more point to make.

The Bank of England has this morning published figures which showed yet another decline in the flow of new lending to households and businesses. Much of this is due to a collapse in demand for credit, as borrowers - wholly rationally - decide to reduce their indebtedness.

But some of the shrinkage in the stock of lending is due to banks' increased reluctance to lend. Which, in the long run, is a good thing - although any acceleration in the contraction of lending would be very damaging right now, when the economy is wavering between recovery and relapse.

So some may think that Lloyds should be obsessing less about how it raises capital - so long as it raises enough - and rather more about how it can make a bigger contribution to pulling the UK out of the economic quagmire which it (its HBOS bit in particular) and its competitors helped to create.

Banks can learn from retailers

Robert Peston | 09:53 UK time, Wednesday, 16 September 2009


It's been a tough recession for retailers, although the better ones are emerging from it stronger relative to their peers than before the deluge.

That's obviously true of the big supermarket groups. But it's probably also true of Next and M&S, which are bouncing back faster than might have been expected.

Next, which this morning announced figures for the first six months of its year, generated a 7.6% increase in operating profit from its eponymous brand, on the back of flat sales (well a rise of 0.9%).

Branch of Next

Pre-tax profit for the group as a whole rose 6.9% to £186m and the dividend was pushed up 5.6%.

Not a bad performance at a time when - for a couple of months at least - the British economy was contracting at an annualised rate in the region of 10%.

Most of our big banks would be sick with envy.

And perhaps they could do worse than to learn from the relative success of our better store groups - and especially in the way that a Marks & Spencer or a Tesco cherishes the relationship with individual customers.

Which is a conclusion that can be drawn from two insightful contributions to the debate about how to fix our banking systems: a speech called Credit is Trust by Andy Haldane of the Bank of England (him again); and a paper entitled Narrow Banking by John Kay (published by the Centre for the Study of Financial Innovation).

Both provide compelling arguments why the proliferation of the giant universal bank - banks like Royal Bank of Scotland, Barclays, Citigroup, Bank of America, UBS, BNP Paribas and so on - have been bad for shareholders and appalling for the global economy.

In different ways, they arrive at a similar conclusion: that a healthier banking industry would have a greater variety of banking institution; and there should be many more specialist or narrow banks, concentrating either on retails services for individuals and small businesses or on the more sophisticated products (the casino services) apparently still desired by big companies, investment institutions and governments.

By the way, if you agree with Haldane and Kay, you will note with some alarm that this kind of industrial reconstruction is nowhere near the agenda of the G20 leaders of the world's biggest economies for their forthcoming meeting (perhaps because, as Prof Stiglitz sniped in an interview with me a few days ago, banks have disproportionate lobbying clout, especially over Congress).

Probably the biggest problem with the universal banking model is that it accentuates the propensity of all banks to conduct themselves as manufacturers, rather than retailers.

Of course, they talk the talk of providing customer service.

But the profit is not in the long term relationship with clients whom they barely know.

The profit is in the opaque fee and interest-rate structure of the credit card, or the mortgage, or the business loan, or the credit default swap, or the collateralised debt obligation.

And this manufacturing mentality has been worsened by technological and market innovations.

The final nails in the coffin of Captain Mainwaring - the apocryphal grumpy bank manager who knew everyone in his local community - were automatic computerised credit scoring and securitisation: why should a bank bother to know any customer when it could lend to him, her or it on the basis of generic data and could flog the loan (packaged up with loads of others) to another bank or an investor as an asset backed security or a collateralised debt obligation?

Of course, what's both hilarious and tragic about the evolution of universal banks into pump-and-dump cowboys is that too many of them believed their own sales patter, and kept too much of the crappy securitised loans as stock in their own warehouses, as assets on their own balance sheets.

What's to be done?

Well, a good starting point would be to remind ourselves why taxpayers in Europe and the US have bailed out the banks to the tune of $15trn, or more than $2,000 for every person on the planet.

It's because there is a utility element of banking that we can't do without - which resides in the transmission of money, in providing basic credit to individuals and businesses, and in providing a safe haven for savings.

I am not claiming that defining the scope of the public-service utility is the easiest job in the world. But nor is it impossible.

And the important point - which most banks seem to have missed - is that in effect the public-service utility bit of what banks do has been nationalised almost everywhere: finance ministries and central banks provided unprecedented loans and guarantees to the banking system in order to preserve the integrity of the crucial financial infrastructure.

What many would conclude is that this public-service utility, which can never be allowed to fail, should therefore be totally separated from all other aspects of what banks do (all the other stuff, from proprietary trading in securities, to manufacturing derivatives, to flogging insurance, to investment management and so on).

The likes of Barclays or Royal Bank would not have to sell off or demerge their retail banks, although they might choose to do so. But their essential-service operations would have to be put into legally separate subsidiaries, where there would be no possibility of financial taint from their other activities.

Were this to happen, the ramifications would be big - and in the short term, pretty disruptive.

It would mean that institutional lenders to banks would no longer benefit from an implicit guarantee from taxpayers. So those lenders would demand that banks pay them a much higher interest rate, as compensation for the increased risk. And that could lead to significant shrinkage in banks' commercial banking and investment banking activities (no bad thing, some would say).

Something like this may occur, on one interpretation of what the Treasury plans in forcing banks to write "living wills" (or reconstruct themselves so that - in a crisis - retail depositors' money could easily be hived off from the rest of a bank).

But the general thrust of negotiations at an international level between central bankers, regulators and finance ministers is not in this direction, but is much more about salvaging the discredited Basel Rules on capital adequacy.

Those rules are arguably part of the problem, not of the solution.

Built into the design of the Basel Rules (hardwired in, to use the cliche) is an incentive to banks to game the system to maximise short term profits, and a disincentive to form relationships with individual customers.

In a diversified world of narrower banks, rather than our homogeneous world of universal banks, it would be possible to re-instate much simpler rules on how much capital and liquidity banks need to hold.

Here's the paradox: for all the evidence that supervision and regulation of banks was both inadequate and too "light touch" over the past few years, the fundamental regulatory structure could be simplified if banks were broken up into their utility and non-utility parts. And a proper competitive market, where there was parity of power and knowledge between banker and customer, might even in time emerge (or is that a hope too far?).

Where's ITV's Ball?

Robert Peston | 15:58 UK time, Tuesday, 15 September 2009


This afternoon I have a television mystery for you, entitled "what is going on at ITV over the appointment of its new chief executive?"

Tony BallHere's the interesting fact: just under four weeks ago, the company sent a letter to Tony Ball, the former chief executive of BskyB, offering him the post of chief executive - subject of course to agreement being reached on the normal terms and conditions (including - ahem - pay).

Ball is keen to take the post.

He relishes the challenge of trying to restore ITV's profitability in the worst television advertising recession ever, and as digital technology transforms the company from a whale in a small pond - a de facto monopolist - into plankton in a vast ocean.

That said, the Competition Commission thinks ITV is still quite whale-like - in that the watchdog pronounced this morning that ITV must continue to be subject to price controls on what it can charge for advertising (which means that if Ball takes over, he'll have one arm tied behind his back).

Perhaps you think Ball is crackers to want to do it, since he doesn't need the money. But there you are: he thinks there's a business with decent returns lurking in there somewhere.

So on receipt of the offer letter, he instructed his lawyer to sort out the contract.

And although part of what he wanted was agreed pretty quickly, negotiations appear to have ground to a halt in the past week.

Which is not to say that there's been an impasse or disagreement, let alone a row. It's just that ITV hasn't been communicating with Ball, for days.

So is it that ITV has changed its mind and wants to rescind the offer to Ball?

That would probably be dangerous for its board, since Ball is backed by a number of big shareholders.

What's the problem?

Well I'm told that the board is worried about the quantum of wonga - or rather incentives - that Ball would like.

I'm sure these aren't small, since Ball is in a rare category of television executive: he has a record of generating profits rather than noise; he has an international reputation; and for the past few years he has worked in mega-bucks private equity.

So it's all a bit of a dilemma for ITV's board: the non-executives are understandably reluctant to pay significantly above - to use the ghastly cliché - the industry benchmark.

In the end there is surely just one question the board needs to answer? Whatever Ball is demanding, does it look reasonable in relation to potential returns for shareholders under his stewardship?

Or - which is what some think - is there something else that bothers the directors? Has the company got cold feet about Ball for another reason?

As I said at the outset, it's a bit of a mystery.

PM: 'We'll cut with Germany, France and the US'

Robert Peston | 17:20 UK time, Monday, 14 September 2009


I have just interviewed the prime minister. Which is often challenging, because of his famous habit of ignoring his interlocutors' questions and saying what he intended to say all along.

And, I'm afraid to say, he didn't choose today to engage precisely and directly with my lines of enquiry.

That said, he did say two or three interesting things, about the unfinished business of reforming the banks, about when it would be right to take further action to cut public-sector debt, and about whether households should save more and borrow less.

Here are some extracts.

Peston: We've talked about the scale of this bailout. As I say, more than $2,000 of support provided by every person on the planet for the banks. What do you say to all those millions of British people who are genuinely seething when they see bankers receiving bonuses of hundreds of thousands of pounds, millions of pounds?

PM: Well, I'm appalled that some institutions are already wanting to return to the old ways - that some of our financial institutions are taking action which, in my view, is not only wrong but counter-productive in continuing - indeed, extending - the bonus culture of the past.

Now I will want an agreement - because we're talking about banks in other countries as well as banks in Europe - I will want an agreement at the G20, not just that we will have words about this, but each authority will take action. We are discussing and examining how we can have a limit on the percentage of bonuses in profits or in revenues. I think the companies themselves have now got to look at the practices that they are employing.

We have taken very, very strong action in the banks that we have some control over. It's now for the world community to come together, so that one country isn't isolated when it takes action on matters like bonuses. But, as for the current behaviour of some of the institutions, that's why I want the G20 to take action against what I think is appalling, unacceptable. And for the future of the banks - because people have got to trust them - it's unproductive...

Peston: It turned out that our banking system here in the UK was one of the two weakest in the world. The other banking system that was in as much difficulty was the American banking system. Do you have no personal regret about failing to spot that?

PM: No, I've been very clear. We should all have been supervising more. In fact, you know, you ask the question: Is the lesson of the last 12 years that we should have supervised more (which is my view) or supervised less (which is the view of our opponents)?

The choice for me is very clear. We have got to ensure for the general public of our country that they can feel that when they go to a bank, that bank can be trusted. They've got to feel that when they put money in a financial institution, that money is safe and secure. And they've got to know that the bankers or financiers that they're dealing with are taking reasonable risk but not reckless risk.

Now that is what we are putting in to all the rules and regulations that will govern the banking system for the future. So, yes, we have learned the lessons. Now I want to make sure that the lessons are learned in every part of the world, because banks are so interdependent with each other, because they're so interlinked and entangled. What can happen - as we found in the American banking system - can directly reverberate right round the world, including in Britain...

Peston: One of the contributors to a significant increase in public-sector borrowing has been the cost of this bailout we've been talking about. Your own chancellor has said that the level, the rate at which public sector debt has been increasing, is not sustainable over the medium- to long-term. When will the economy be strong enough for you to feel it's the right moment to raise taxes or cut public spending to get that debt level down?

PM: Well the first thing to recognise is if we withdrew the measures that we are taking at the moment, which are underpinning the road to recovery for the economy, it would be very dangerous. This... recovery is not automatic. This is a fragile economic situation...

Peston: As and when you perceive that the economy is strong enough to cope with the kind of decisions that you'll need to make to get those debt levels down, do you know in your own mind yet which spending programmes in your view can be sacrificed?

PM: I think we're pretty clear. That there is a deficit reduction plan we've already announced. That means we're raising the top rate of tax, as everybody knows, of income tax; we're removing a lot of the previous tax reliefs that have been generous, but...

Peston: It's not enough though, is it?

PM: cannot justify in a period of difficulty. We're raising national insurance by half a percent. These things are being done so that we can pay for our public services, while at the same time making sure that the economy continues to reduce the deficit. I think you'll end up with a situation where the debt levels in all major countries are roughly the same - Germany, France, America and Britain - and I think you'll get an agreement amongst all these countries about the right timing for us to take the further action that is, that is necessary...

Peston: Do you think people need to change their borrowing habits?

PM: I think... I think I would put it another way. I think the banks have got to be more responsible in the way they approach people. I think the banks have got to make sure that they don't get into a position where they're using instruments that put the institutions at risk. And I think customers themselves obviously will want to be prudent in the way that they deal with their own finances...

Peston: I mean, on a personal level, when you were chancellor did you worry about the way in which particularly household sector indebtedness was increasing - individuals were borrowing more and more and more?

PM: Well, I've never been someone who myself has been interested in running up personal debts or borrowing huge amounts of money. But at the same time, I think you've got to recognise that when people buy a house, for example - and that's where a huge amount of the borrowing occurs - they're doing so on the basis that they can pay back that money over 15 or 20 years, they're getting a valuable asset.

Gordon Brown

So there you have it: the prime minister doesn't like borrowing personally, but understands why others do; he'll wait for Germany, France and the US to cut their deficits before taking further steps to reduce the British national debt; and reforming the banking system is seriously unfinished business.

The lessons of Lehman

Robert Peston | 09:08 UK time, Monday, 14 September 2009


Where Broadway ends in New York's financial district is the larger-than life sculpture by Arturo Di Modica of the rampaging Wall Street bull. Every day it draws mobs of tourists, all wanting to be photographed leering at its out-sized bullhood.

Robert with Wall St bull

Which is pretty much how many feel about the denizens of this part of Manhattan. Or to put it another way, few can believe the bull-sized cojones of bankers to be taking fat bonuses again so soon after the collapse of Lehman Brothers triggered the worst financial and economic crisis since the 1930s.

It is the anniversary of the banking calamity that symbolises this age of financial anxiety. And in separate films for Newsnight (to be broadcast tonight) and for BBC World (already being shown) - and also in a special edition of Business Daily for BBC World Service - I've been evaluating the carnage from Lehman's demise and what steps are being taken to protect us when next banks abandon all common sense and lend as though tomorrow never comes.

Lehman's collapse was the trigger of the worst banking crisis the world has experienced for almost 80 years. In fact, as Lord Turner - chairman of the Financial Services Authority - recently told me, it is arguable that the financial crisis was the most severe ever, in that there was almost no hiding place from it anywhere in the world.

But - and this is important - the death of Lehman was not the underlying cause of the deepest global recession since the 1930s.

The cause of the global recession was a banking system that had expanded its lending and investing beyond what was remotely sensible, atop flimsy foundations, which was lethal because of the build-up of unsustainable debts by households and businesses in the US and other economies, including the UK's.

Lehman Bros - a firm not far short of its 160th birthday - was simply one example among many of a bank that had lent far too much relative to its capital resources (its buffer for absorbing losses), that had far too little cash and secure funding to reassure creditors that it could not run out of the readies, and that was too intimately connected in too opaque a way with too many other financial institutions.

This combination of inadequate capital, insufficient liquidity and complex relationships of mutual dependence with other institutions was characteristic too of Royal Bank of Scotland, UBS, AIG, Citigroup, Merrill Lynch, HBOS, and so on.

All were vulnerable to collapse. And the collapse of any one of them would have damaged many other firms of importance to the financial system.

Lehman was a little more unstable than the others - and turned out to be the only one that the authorities would not save.

It's because there were so many other weak banks and financial institutions, that all of those whom I interviewed for the film said the US Treasury made a huge error in allowing Lehman to fail, in not using public money to prop it up.

Here's Sir John Gieve, who at the time was a deputy governor of the Bank of England: "it was clearly a disastrous decision not to save Lehman".

Or Sheila Bair, the US banking insurer and regulator as head of the FDIC: "sure, it was a mistake".

Or Rodgin Cohen, one of America's most influential commercial lawyers as chairman of Sullivan & Cromwell: "we were as close as I've ever seen to the edge of the abyss - the abyss being a collapse of the financial system".

Many would applaud the motives of Hank Paulson, the US Treasury Secretary, in refusing to put in public money to prop up Lehman: it's plainly wrong to provide a guarantee to banks that taxpayers will always bail them out for their mistakes, especially when individual bankers can become so rich by taking crazy risks.

Unfortunately this turned out to the wrong time and place to spank the banks - because rather more punishment than may have been necessary or fair was also inflicted on taxpayers.

The US Treasury recognised within hours of the death of Lehman on 15 September that it had messed up, so it - and other governments, including the UK's - embarked on the biggest banking bailout of all time.

Taxpayer support for banks and other financial institutions - in the form of loans, guarantees, investment and the creation of new money - has ballooned to $15 trillion in just Europe and the US. That's equivalent to about a quarter of everything the world produces in a year, global GDP, or more than $2,000 for every person on the planet.
The price of allowing our debts to rise to dangerous levels and of permitting the banking system to become so rickety has been far too high.

But reform of the banking system has been painfully slow. And the indebtedness of the US and UK economies - including escalating public-sector debt - has been increasing.
So the recession may, in a technical sense, be coming to an end. But we have not yet solved the serious structural weaknesses of either the financial system or our economies - and until we do, any recovery may well be insipid, intermittent and fragile.

You can see my report on Newsnight on Monday 14 September at 22:30 on BBC Two or following that on this website.

Hester: fast recovery "dangerous"

Robert Peston | 08:41 UK time, Saturday, 12 September 2009


The chief executive of Royal Bank of Scotland has said that a slow recovery from recession would be far better for the UK in the long term than a rapid bounce.

In an interview with me for the last in the present series of Leading Questions, broadcast on the News Channel this weekend, Stephen Hester says "arguably what we need as an economy is a rather gradual emergence from recession where the economy can complete the rebalancing that has not in any way been completed, where people can save more, borrow less, the balance of payments deficit closes, the government gets its own deficit under control".

He says that the priority for the UK is to reduce the indebtedness of public sector, households and businesses. And that if debt is repaid, inevitably that will lead to less spending and investment and thus lower growth.

It's call for all of us to make short term sacrifices for longer term rewards - which some will regard as somewhat amusing, given that it comes from a banker.

But he says that if we return to our ways of the boom years, where households and businesses spend but do not save, the UK could face a "Japanese style lost decade where the economy is highly unstable, or worst case we actually have another down period, a so-called W-recession."

So Mr Hester described a fast recovery, were it to happen, as "dangerous".
His remarks may well be seen as self serving, because the banks are being accused - even by the Bank of England - of lending less than the economy currently needs.

However, Mr Hester insists that Royal Bank is supplying the credit demanded by viable customers. And he says it is a good thing that the volume of lending to companies is falling, because that shows - he says - that companies with excessive debts are choosing to reduce their borrowings.

Mr Hester's clarion call for debt to be reduced may well be seen as implicit support for the Tories, who have been the most vocal of the parties in their demand for the rise in public sector debt to be stemmed.

However Mr Hester refused to be drawn on which party would, in his view, be best in government at addressing what he sees as the imbalances in the British economy.
He said "as anyone in my job and particularly given the government shareholding in my the bank, I'm going to stay well away from a political judgement."

Mr Hester also admitted that his parents, who are academics, believe that "bankers get paid too much".

How did Phoenix Four do it?

Robert Peston | 13:08 UK time, Friday, 11 September 2009


I feel slightly nauseous having waded through a substantial chunk of the inspectors' report into the demise of MG Rover.

The five executives criticised in the report feel hard done by. They have issued a robust riposte - and accused the inspectors of whitewashing the involvement of the government in Rover's collapse.

Q gate at the Longbridge MG Rover plant, 08/04/05

But they make no attempt to justify the astonishing sums of money they extracted from a business that needed every possible penny retained for investment, were it to have the faintest chance of staying alive.

The basic story is this.

In May 2000, the Phoenix consortium - John Towers, Nick Stephenson, Peter Beale and John Edwards - acquired the business for nothing (well, a nominal £10) from BMW. And because BMW wanted shot of this loss-making motor manufacturer, the German company endowed it with £75m (in lieu of warranties) and an interest free 49-year loan of £427m.

BMW's largesse ensured that MG Rover could survive for a few years. But from the outset, it was clear that it had no long-term future unless it could find a substantial business partner within the motor industry.

To be fair to the consortium, it did try to find such a partner.

But the executives - and the chief executive they appointed, Kevin Howe - failed to meet their own targets for car sales (they wanted to sell 180,000 vehicles a year; retail sales in 2004 were just 115,000). And operating losses for MG Rover could not be stemmed.

In the five years to the end of 31 December 2004, operating losses were £962m - and the business was losing money at the rate of £250m a year by the time it shut down.

This is not a tale of industrial success. However, as I mentioned last night, Messrs Beale, Edwards, Stephenson and Towers each pocketed £9m (give or take a few thousand) between 2000 and 2005 and Mr Howe received £5.7m.

Also they arranged to receive a further £14.4m between them - which the inspectors say they "now stand to obtain" although the executives insist they won't be receiving this sum.


The inspectors describe the remuneration as "unreasonably large" for a whole host of reasons, such as:

(1) the financial performance of the business was lamentable;
(2) the executives risked only paltry sums of their own money;
(3) they had never in the past been paid anything like this for their alleged business skills.

How did they get the money out?

Well the loss-making operating company, MG Rover Group, which made the cars, was separate from the company that held the loan from BMW, Techtronic. Now, although the loan from BMW was interest-free, Techtronic charged interest on the loans it made to Rover.

Hey presto: Techtronic generated a profit, even though Rover was incurring losses.

And Techtronic paid dividends to another company, Phoenix Venture Holdings, which in turns rewarded Towers et al.

MG Rover reportThe other primary source of rewards for the executives was tax losses, primarily tax losses of MG Rover. According to the inspectors:

"tax losses to which MG Rover Group was entitled were transferred to PVL and PVL2, subsidiaries of PVH in which MG Rover Group had no interest, to facilitate schemes suggested by Barclays Capital".

As you know, Barclays Capital's creativity in generating profits from tax deals is legendary - although there is no suggestion in the report that this subsidiary of Barclays did anything improper.

I should also point out that the inspectors make no criticism of Rover's auditors, Deloitte, although they do say that:

"Deloitte... played a very prominent part in a number of transactions that helped, or could have helped, the Phoenix Consortium to achiever their financial ambitions".

I could go on and on (although the inspectors' 830 pages could have benefited from some judicious editing).

But there are two further points to make.

The inspectors say that the executives exaggerated in statements to MPs the personal financial risks they were taking. And the inspectors add that the executives misled MPs about how they engineered for profits to be extracted by them, rather than being available for use by the operating business.

Also, there is a riveting chapter about how one of the executives, Peter Beale, used specialist computer software to eradicate documents of probable relevance to the inspectors' enquiry.

The inspectors say that "we consider that Mr Beale gave untruthful evidence during his interviews" when he said that "he had not deleted from his laptop any documents relating to the companies under investigation".

However, the inspectors found no evidence that a crime had been committed either by Mr Beale or his colleagues.

How Rover executives pocketed £42m

Robert Peston | 21:47 UK time, Thursday, 10 September 2009


Criticism of how five executives extracted £42m in pay and pensions from MG Rover will be made tomorrow in a report by independent inspectors appointed by the Business Department.

The inspectors - Gervase MacGregor of the accountants BDO Stoy Hayward and Guy Newey QC - will not accuse the so-called Phoenix Four and the chief executive they appointed of breaking the law (and the Serious Fraud Office recently concluded that it would not launch a case against them).

But their report is a humiliating 800-page catalogue of how they enriched themselves while the last UK-owned mass market motor manufacturer hurtled towards insolvency.

Each of the Phoenix Four - John Towers, Nick Stephenson, Peter Beale and John Edwards - received around £9m, according to the report. Their chief executive, Kevin Howe, pocketed £5.7m.

I understand that the Business Secretary, Peter Mandelson, will commence proceedings to disqualify the four as directors.

The report contains a mountain of detail of how the quartet profited from a business in dire trouble.

Rover cars destined for the scrap heap at a car breakers yard near York, Friday 15 April, 2005, following the announcement of the end of car production at the MG Rover plant / Press Association

It catalogues how John Towers, Nick Stephenson, Peter Beale and John Edwards made personal fortunes out of MG Rover - in stark contrast to the more than 6,000 MG Rover employees who lost their jobs when the firm collapsed into administration in April 2005 with debts greater than £1bn.

This was a pathetic end for the last British-owned volume car manufacturer.

I am told that what is striking about the report is that there is no serious attempt to place Rover's demise into the context of the woes of the wider industry.

And some may be surprised that a report - which took more than four years to produce and has cost £16m of taxpayers money - contains no serious criticism of government, even though what was then called the Department of Trade and Industry, and is now called the Business Department, was intimately involved in attempts to save MG Rover.

In particular, the circumstances have always been murky surrounding a decision by Shanghai Automotive Industry Corporation of China not to pursue a rescue takeover of MG Rover in the spring of 2005. At the time, SAIC was insisting that the British government provide a temporary £100m loan to MG Rover to guarantee its solvency.

The Phoenix Four took control of the company in May 2000. They bought MG Rover for a nominal £10. The business came with an interest-free loan of £427m from BMW, the previous owner.

Lloyds to cut use of taxpayer insurance

Robert Peston | 11:15 UK time, Thursday, 10 September 2009


Conditions in the banking market have improved markedly since the start of the year.

Loans are going bad at a slower rate than the worst case scenarios of six months ago. And bank share prices have risen very sharply indeed.

Branch of Lloyds bankFor those are interest in that sort of calculation, taxpayers were sitting on an unrealised profit of £1.1bn on their ginormous holdings in Royal Bank of Scotland and Lloyds as of this morning - consisting of a £2.8bn gain on Royal and a £1.7bn loss on Lloyds.

Now I don't expect Stephen Hester to crack open the bubbly when I see him later this morning, to interview him for the last in the current series of Leading Questions (which you can see on the News Channel this weekend).

His way is always to accentuate the negative in interviews, with the hope of delivering results that are better than expected. So I anticipate hearing that it's still a little too early to say we're over the worst.

By contrast, Lloyds is acting on the basis that it is past the peak risk of disaster - in that I can confirm that it wants to reduce its use of the Treasury's asset protection scheme, or even do without it altogether (though I think zero use of the scheme by Lloyds is the least likely outcome).

You will recall that when the outlook for banks looked particularly bleak, Lloyds announced its intention to place £260bn of loans and investments into this scheme

This would have meant that taxpayers would bear 90% of future losses on these loans, after Lloyds incurred a first loss of £35.2bn.

It was a way of insuring Lloyds against losses that could have wiped out its capital and bankrupted it.

And for our trouble, taxpayers were to receive a hefty fee, in the form of £15.6bn of non-voting shares - that would have lifted our effective stake in Lloyds to 62%, from 43%.

Now I have spoken to a number of Lloyds big shareholders and they have told me that they regard the scheme as less necessary than it was, because loans are no longer going bad at the rate feared a few months ago.

And they say that with stock markets rising, they are prepared to subscribe new capital to Lloyds, to increase its buffer against future losses, as an alternative to the scheme.

Lloyds is working on such a fund-raising alternative to the asset protection scheme.

One option is a combination of a rights issue and an offer to holders of £7bn of so-called preferred securities, to convert this lower quality capital into higher quality ordinary shares (higher quality from the perspective of the regulator, rather than investors).

Naturally Lloyds can do nothing without the agreement of the Financial Services Authority and UK Financial Investments, which looks after taxpayers' interest in Lloyds.

Both are agnostic about whether Lloyds strengthens itself by using the asset protection scheme or by issuing new shares.

In other words, Lloyds has the green light to come up with an alternative to the asset protection scheme.

And, as I have said, I would expect it to announce a hybrid approach, that it will be raising billions of new equity capital and putting far fewer loans and investments into the asset protection scheme than originally announced.

There is however one big outstanding issue.

Will the Treasury demand that we taxpayers be paid a fee for the way we have underwritten this bank over the past six months by promising the asset protection scheme? (The US treasury is making such fee requests of banks that don't want to take up promised support of this sort.) This is a fraught and controversial question.

Anyway, what Lloyds plans in scaling back its use of the asset protection scheme is another sign that the economy is in better shape than it was.

Now I wonder what Stephen Hester will tell me in a few minutes when I ask him whether Royal Bank still needs the asset protection scheme.

Why are companies not borrowing?

Robert Peston | 09:50 UK time, Wednesday, 9 September 2009


The stock market has bounced with a vengeance; house prices are rising; takeovers are back; the latest estimates of GDP indicate the economy is growing; Moody's says the UK is likely to keep its AAA credit rating.

Bank of EnglandAnd, perhaps most striking of all, the cost for banks of borrowing from other banks and financial institutions - relative to borrowing from the Bank of England - has returned to where it was before the credit crunch began in the summer of 2007.

Crikey, all that nasty stuff - the inability of banks to borrow which eventually triggered the worst global recession since the 1930s - was just a bad dream; it turns out everything's fine.

Well, not quite.

The National Institute's estimate of what has been happening to GDP indicates that if there is a recovery in train - and, as I've been saying for some time, there probably is - that recovery is pretty insipid.

And it warns that the UK could easily slip back into a contraction.

Also, it will be some time before unemployment ceases to increase. In fact, some companies have told me that they would delay announcing big cuts in job numbers until their finances improved a bit, because they could not afford the redundancy costs while their sales were in freefall and they were unsure whether their bankers would pull the plug.

Cometh economy stability, cometh the axe.

That said, the impact of rising asset prices is not to be sniffed at - because it was the earlier fall in asset prices which to a large extent created the vicious combination of a credit drought and a collapse in spending by businesses and households.

So when shares and property rise, they tend to create a recovery which feeds on itself in a positive way, in a benign version of what gave momentum to the earlier plunge in output.

So things are definitely a lot better than they were.

Where do we go from here?

For me, that drop in the price of interbank lending - the fall in the rate charged by banks for borrowing from each other - tells an important story.

It implies that a good deal of all that money created by the Bank of England in its quantitative easing programme - perhaps too much - is staying within the banking system, rather than stimulating activity in the real economy.

Why? Well, the Bank of England's fear is that banks are being too averse to risk, that they don't want to lend even to businesses that are fundamentally viable.

And there is evidence that some legitimate requests for credit are being turned down.

But there is something else happening as well: many companies have recognised that their balance sheets are over-stretched, that their debt is too high relative to their devalued assets, and are choosing to repay debt.

Right now it is hard to find a substantial listed or private-equity financed business that actually wants to increase its debt - and many have programmes to reduce their borrowings.

There are, for example, a number of big companies which are technically insolvent: on a realistic valuation of their assets, and including the deficits in pension funds, their liabilities exceed the value of their assets.

They can keep going, because they are generating cash from operations. But although they won't admit it, for fear of panicking shareholders and creditors, they are in what is known as "workout" mode. They are concentrating on shrinking to pay down borrowings.

Paying down debt is rational for each individual business, but it collectively leads to lower investment, lower employment and lower demand in the economy as a whole - and therefore feeds back into worse conditions for business in aggregate and lower economic growth.

This pernicious trend of corporate debt reduction hobbled the Japanese economy for 15 years, according to the compelling analysis of Richard Koo (in his The Holy Grail of Macro Economics).

Corporate debt minimization can't do as much damage here because the debt of British businesses never reached the peaks of Japanese corporate indebtedness - and nor did our asset bubble become quite so egregiously pumped up as theirs.

But if it turns out to be the case that for an extended period, businesses will be choosing to repay debt rather than investing in growth, that will have significant implications for all of us.

It would imply that if households and government also chose simultaneously to cut spending to reduce their excessive debts - and on most analysis, the UK's indebtedness problem is concentrated on the household and public sectors rather than the corporate sector - then the incipient economic recovery could be snuffed out pretty fast.

Which explains why central bankers and finance ministers are only making plans to end their exception stimulus measures, rather than setting a precise date for the withdrawal of the prop.

The future is a merger

Robert Peston | 08:46 UK time, Tuesday, 8 September 2009


It has started, as it inevitably would: the process of companies trying to reduce their costs as we come out of recession by merging with businesses in their own industries - or what are known as in-market mergers.

T-Mobile and OrangeToday we've had the announcement that France Telecom and Deutsche Telekom are combining their UK mobile operations, which means that Orange will be glued to T-Mobile.

This is a big deal.

If allowed by the regulators, the enlarged business would have almost £8bn of revenues and 28m customers, which the companies say are 37% of all UK mobile subscribers (these sums only work on the basis that lots of people have more than one phone).

Why are they doing it? Well, the companies say they have 3.5bn reasons - because they estimate that savings in running their networks, in distribution and other areas will over time add up to £3.5bn in today's money (that's the net present value of cumulative synergies).

From the point of view of the businesses, this is rational.

We're coming out of the bleakest period for the global economy since the 1930s but most companies believe recovery will be fairly insipid in the UK.

So to generate incremental profits, the focus has to be on reducing costs. And one of the best ways of doing that is to marry a similar business and remove overlapping activities.

In a way, this process was initiated by Lloyds' controversial decision last autumn to buy HBOS - though this takeover showed that such deals are not risk free, and many of Lloyds' shareholders are sore at the losses they inherited on HBOS's reckless loans to companies.

Also there's an element of looking for efficiencies in Kraft's £10bn offer for Cadbury. That said, Kraft is probably more motivated by the idea that a fairly counter-cyclical business such as Cadbury probably isn't going to get cheaper (and, by the way, the market reaction tells us that for Kraft to stand a chance it will have to raise its offer very significantly).

There will be more of these mergers within particular industries in the coming weeks and months, and not because there are a vast number cooked and ready to go, but because big businesses have a sheep-like quality: the mood in boardrooms will switch from fear of doing anything too bold in uncertain times, to fear that doing nothing will look pusillanimous.

To repeat, eating your rivals probably makes sense for businesses and also for their shareholders, so long as the bidder does not overpay: buying a competitor to generate cost-savings is usually not a licence to destroy wealth for shareholders in the way that other kinds of takeovers (such as those motivated by a desire to become big for the sake of bigness) frequently have been.

But that doesn't mean we should cheer when these deals are announced or that they are necessarily good for the economy.

Cost savings normally equal job losses, which - at a time when unemployment is still rising - can be very painful for those whose careers are sacrificed on the altar of corporate efficiency.

And in some industries, such deals would lead to cuts in research budgets that are valuable to the UK's economic potential and to the transfer of these precious research activities to countries such as India where costs are lower.

Having recently demonstrated that we have become a little too reliant on one industry, finance, we ignore any slimming down of our productive potential in other industries at our peril.

However, it is the impact on competition about which we should be most wary.

We're going to hear lots of sob stories from businesses wanting to merge, about how they'll only be able to invest enough to provide customers with the products and services they deserve if they're allowed to become ginormous.

But today's enhanced cash flows for investment are tomorrow's massive market share and ability to fix prices at levels detrimental to consumers.

As John Fingleton, chief executive of the Office of Fair Trading, says today in a thoughtful speech, the pendulum has been swinging against the notion that competitive markets are good for us, because of the massive costs we've all suffered from the recent market failures in banking.

That said, what happened in banking is not a demonstration that liberal markets are per se bad for us: the madness of banks converting dodgy loans into gilded investments was an example of what can go wrong when markets are dangerously opaque so that prices aren't set in a rational way; it doesn't show that transparent markets filled with lots of suppliers and vast numbers of informed customers are per se bad.

Some of the old rules surely still apply, such as that when a giant institution says that it's in the interests of the nation or of consumers for it to get even bigger, well we should probably presume that's untrue, pending unambiguous proof to the contrary.

The real G20 breakthrough

Robert Peston | 09:29 UK time, Monday, 7 September 2009


Just out of interest, which do you think is more important: limiting how much bankers are paid, or strengthening banks so that they are better able to absorb losses on loans and investments and less likely to run out of cash when creditors demand their money back?

You may think this is a false dichotomy. And to an extent you are right.

Because the so-called bonus culture within banks contributed to the crazy risks they took in the bubble years leading up to the crunch of 2007, and was therefore a contributor to the worst financial and economic crisis the world has experienced since the 1930s.

Even so, when it comes to sleeping easier at night, most of us are probably less concerned about what our bankers are being paid and are more concerned to know that they have enough capital and liquidity or cash to withstand whatever tremors and storms lurk ahead.

Which is why the media coverage of this weekend's meeting of finance ministers from the G20 biggest economies was unbalanced.

Governor of the Bank of England Mervin King, Chancellor of the Exchequer Alistair Darling, Britain

It focussed almost exclusively on the allegedly "sexy" and "easy-to-grasp" agreement that bankers' pay must be reconnected to the fundamental performance of banks, which would imply the end of get-rich-quick.

Or to put it another way, the stories - and the posturing of some finance ministers - tried to satisfy the perceived desire of most of us to bash bankers for the havoc they've wreaked.

But arguably the ministers agreed something else more important, largely ignored by the non-specialist media because it is thought to be too dull and hard - which was to strengthen banks' financial foundations and to make it more expensive for banks that are big and complex to carry on their reckless pursuit of speculative profits.

That may not titillate you, but it is far from boring, in that there are few more important questions for any of us than whether our money is safe in the bank.

And our confidence that our banks are secure will only return when the banks demonstrate that they are managing themselves prudently - which is a matter of both the incentives they offer to staff and their financial strength.

As I said in my recent Richard Dunn lecture, we have been badly let down by the priesthood of regulators, central bankers and finance ministers - to whom we unknowingly delegated all authority to devise rules to maintain the stability of our banks and the financial system.

We would be foolish to switch off our brains and simply trust them to get it right this time round. But, of course, democratic engagement in this process requires us to take an interest.

So just in case you are up for that, these are just some of the issues that are hugely important and remain unresolved:

• should the capital requirements imposed on retail and investment banking conglomerates such as Barclays, Citigroup and UBS be so punitive as to force those conglomerates to break themselves up into smaller, less complex units?
• what tools should central bankers be given to deter banks in general from lending too much in boom periods?
• should there be a strict and relatively low limit on banks' gross lending investing relative to their capital resources, what is known as their "leverage", as a safeguard against them gaming more sophisticated rules?
• should we move quickly to force banks to increase their holdings of capital and cash, which brings the danger that they will lend too little while the economy is vulnerable?
• should there be a cap on what banks can pay out in bonuses or variable remuneration relative to their profits?

We are still probably months away from resolution of these questions, that will determine not only the robustness of the infrastructure of the global economy but also the prosperity of countries like the UK and US, where the growth in recent years has been hugely dependent on the availability of cheap credit and where the financial sectors have provided a relatively high proportion of economic growth and tax revenues.

And, by the way, you can hear me discussing what is at stake with Adair Turner, chairman of the Financial Services Authority, in this week's edition of Peston and the Money Men (on air now and on iPlayer).

Which brings us to one of the great challenges for anyone wishing to be a dispassionate observer - and that is to screen out the nationalistic noise emanating from individual finance ministers.

On the occasion of this latest G20 confab, there were clear if perhaps irrational dividing lines between the British and Americans on the one hand and the French and Germans on the other.

The French and Germans in effect accused the UK and US finance ministers of being too soft on bankers' pay. But this was perhaps a neat distraction from their own sensitivity, which is whether the big French and German banks have enough capital.

Just before the summit, Tim Geithner - the US treasury secretary - issued a statement saying that the priority was for banks to raise more capital and for a ceiling to be imposed on how much any bank can lend as a multiple of its capital (the leverage multiple I mentioned earlier).

In a way, this was easy for him to say. Because, in general, US banks have lent between 10 and 13 times their core equity capital, whereas French and German banks' equivalent lending multiples are between 30 and 70.

On that analysis, French and German banks would need to raise a ton of expensive new capital - even though they have proved themselves to be far less reckless in their lending than their US and UK counterparts in recent years.

In fact, over the past few years, French and German banks have been more leveraged, to use the ghastly jargon, than the hedge funds which their politicians profess to despise.

Which rather implies that there will need to be cost and sacrifice for them and their banks, as well as for those of the UK and the US, in mending global finance.

Can governments squeeze bankers' pay?

Robert Peston | 20:33 UK time, Thursday, 3 September 2009


I'm in New York filming a piece on where we are in respect of reform and recovery as we approach the anniversary of the demise of Lehman Brothers.

But I felt compelled to break off for a few minutes to assess the proposals advanced today by the troika of Sarkozy, Merkel and Brown to limit bankers' pay.

And I have to say that at first blanche the measures appear a tad muddled.

What is lacking is any sophisticated explanation of why the three wish to limit bankers' pay - other than their statement of the staggeringly bloomin' obvious that big bankers' rewards, so soon after banks were bailed out to an unprecedented extent by taxpayers, upsets a lot of their respective voters.

I think we know that.

But is it the sheer magnitude of the rewards that's wrong - their contribution to the growing inequality of our societies?

In which case, should there be a cap on the rewards of footballers or broadcasters (especially those who don't deliver, perhaps)?

Or is it that some bankers were rewarded for taking dangerous risks?

Well maybe we don't need the politicians to lecture us on the madness of paying bankers to kill their institutions and the economy: plans are pretty well advanced in most developed economies - both unilaterally by bank boards and enforced by regulators like the UK's FSA - to make sure that bankers' remuneration is more closely aligned with long-term performance and that bonuses sit in a de facto escrow account for a few years till its clear that they're genuinely merited.

That said, stipulating that bankers' pay should fall as well as rise to reflect what's really going on at the bank - which the three heads of government do - won't prevent huge payouts to those who generate huge returns.

Which brings us to the controversial part of the trio's recommendations, which is this: "we should explore ways to limit total variable remuneration in a bank either to a certain proportion of total compensation or the bank's revenues and/or profits."


As my colleague Stephanie Flanders says, there is some intellectual coherence to the idea that variable remuneration should not be too great a proportion of banks' income, so that they make sure that their reserves are increasing sufficiently to absorb future losses on loans and investments that go bad.

But it was not the quantum of bonuses paid out by Royal Bank of Scotland, or HBOS, or Northern Rock, or UBS or even Lehman Bros that depleted their capital resources to dangerously low levels.

What did for all of them was expanding their loans and investments way beyond what was prudent relative to their capital.

Now admittedly these banks were motivated to do this in part by the lovely prospect of all the bonuses that would be generated from the profits they expected (wrongly) to flow from all that lending and investing.

However it was the culture of linking pay to profits which did the damage, rather than magnitude of the bonuses themselves.

Which takes us to the nub of the question.

Do we want bankers to simply receive fat rewards that have no link to the performance of their institutions, in the hope this will make them more prudent stewards? That doesn't sound like a particularly compelling idea.

Or is that we simply want them on slim pickings? In which case, the better ones will quit to form or join hedge funds and other financial boutiques - where they'll be free from the nannying of Sarkozy, Merkel and Brown.

Either way, and as Adair Turner - chairman of the FSA - has pointed out, it's pretty difficult to put a lid on pay in the wider financial industry, especially a globalised one.

Remuneration in finance is like a blancmange. If government and regulators squeeze one part, it will bubble up somewhere else.

If big banks are restricted in the cash rewards they can pay their top staff, they will reward them in other ways - with increased pension contributions perhaps, or cheap loans. Or they'll pay a fortune to the best ones by hiring them on rolling short term contracts, to keep them off the official books.

And, as I've said, the most likely impact of pay reforms with teeth will be to fragment the industry into lots of privately owned firms, which will be insulated from state interference on remuneration.

So the most likely outcome would be a sort of re-arranging of the deckchairs, big changes for individual institutions.

If adopted globally, for example, I can't see how Goldman Sachs could remain a public company. That most generous of payers would surely have to dismantle its balance sheet and reconstitute itself as an old-fashioned partnership.

In other words, what the three leaders are proposing is far less radical than the suggestion of Adair Turner.

His proposal for a new global tax on what he has described as the banks' socially useless activities would attack what he would see as the root of the problem, which is the excessive bank income that spews out all those enormous bonuses.

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